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Your T-Bills Are Maturing, What's Next?

If you have put your money into T-Bills in the last quarter of 2022, congratulations because those were some of the juiciest coupons in recent decades. This is one of those opportunities that come once in a lifetime. If you do not grab it, you may not see it again. These T-Bills will mature soon, and you may be thinking about what to do next. Are we going to see another opportunity to invest in high-yielding T-Bills? By the end of this post, you will see that when one door closes, another opens 😊

Commodity Prices Are Coming Down

2022 was the year for commodities. It was the only asset class that made good returns. However, 2023 is a different story altogether. Commodity prices have fallen victim to gravity. Although prices have not reverted to pre-inflation levels, the trend is clear. Despite attempts by OPEC to prop up prices, crude oil still fell below $70/bbl for the second time.

CRB Index

Where Commodities Go, Inflation Follows

Historically, there is a strong correlation between commodity prices and inflation. This makes sense because raw material prices feed into prices downstream. It can be direct in the case of consumer products. It can be indirect in the form of energy costs and the pump prices at petrol stations.

Correlation between commodity prices and inflation

What Is The Market Expecting?

The market is always looking ahead, so let's look at what market participants expect inflation to look like in the future. We can use the 5-year breakeven inflation rate to gauge the expected average annual inflation rate over the next five years. From the looks of it, inflation expectation is well-anchored.

5-year breakeven rate

What Is The Fed's Outlook?

The Federal Reserve has an inflation monitoring team that resides in Cleveland. They maintain a nowcasting tool that looks at inflation over the next month or two. Based on their recent nowcast, inflation is expected to continue to trend down.

CPI nowcast

Have We Seen The Last Rate Hike?

The Fed raised the Fed Funds rate by 25 bps in the May FOMC meeting, but Jerome Powell maintained a "data-dependent" stance for future meetings. However, the market expects the end of the rate hike cycle based on Fed Fund futures pricing. Most market participants think the Fed will keep rates steady in the June FOMC meeting. A small minority expects a 25 bps cut.

Market expectation for June FOMC

One Door Closes, But Another Opens

Based on the above analysis, the days of high-yielding T-Bills are likely behind us. But this opens up a new opportunity for maturing T-Bills. Those who read our earlier posts on Capital Protected Portfolio and A Perfect Barbell Strategy would know this opportunity. But for this post, the focus is on an SGD capital-protected portfolio that caters to those Singapore readers who do not want FX risk.

Together with our iFAST senior investment adviser, we have identified several suitable SGD bonds that can be used. Let me use one of them to illustrate how this works. Below is some salient information on the bond.

SGS bond

This 10-year bond issued by the Singapore Government pays a 2.625% coupon semi-annually. The closing price of this bond on 4 May 2023 is 99.87. If we ignore the coupons, we can pay $998.70 today, and we will get back $1000 when it matures on 1 May 2028. We can play with a $1.30 spare change and still get our principal back. However, if we include future coupons, we can pay less and still get back our principal at maturity. The mechanics behind is complicated, but it can be done. This gives us more cash that can be used to invest in a high-return strategy that can potentially return more than the yield on the bond. Based on the historical performance of this strategy, the annualized return can be as high as 8-12%.

Because everything is done within an iFAST managed account, there are a few good things that can potentially happen:

  1. If interest rates fall, the bond price will increase, and the principal can be returned early by selling the bond in the secondary market.

  2. If the high-return strategy does well, profits can be locked in as cash pay-out roughly every 2-3 years.

  3. The principal is fully backed by the Singapore Government, unlike most structured products that carry the risk of the issuing bank.

  4. If a recession hits and the stock market goes down, there might be windfall profits from the high-return strategy because it tends to thrive during a stock market crisis. Furthermore, the Fed will likely cut interest rates dramatically. This will make the bond price shoot up.

The above is only one example. There are other SGD bonds and USD ones that can be used. Our partnering licensed investment adviser Da Wei has started to run this on the iFAST brokerage platform for students and clients alike. This capital-protected portfolio is only possible while interest rates are still high, so if you want to know more, click the button and register your interest now!

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